In 2016, The DAO raised over $150 million worth of ether (the cryptocurrency of the Ethereum network) to invest in blockchain-based startups. The funds were managed by a decentralized autonomous organization, or DAO, which is an entity that runs on code rather than being centrally controlled. After a hacker exploit resulted in the loss of one-third of the fund, The DAO was shut down.
But the idea of a DAO lived on, and not just in the blockchain space. Today, there are DAOs for everything from open-source software development to cooperative housing. If you're thinking of setting up a DAO, here's what you need to know.
What Exactly is a DAO?
There are three ideas to understand in a DAO, and they're in the name:
- Decentralized: A DAO is not centrally controlled. There's no one person or group in charge. Instead, decisions are made by the community that participates in the DAO.
- Autonomous: A DAO is autonomous, meaning it runs on automatically-executed code. There's no need for a human manager to make decisions or oversee operations.
- Organization: A DAO is still an organization, and it still needs to accomplish specific goals. In other words, it's not just a bunch of code; it's a set of rules and incentives that helps a group achieve something collectively that they couldn't do on their own.
Different DAOs adhere to these definitions more or less than others. For example, some DAOs are completely decentralized, with anyone being able to participate. Others require participants to go through a KYC process. And still others have a centralized team that oversees the operations of the DAO (though this team is usually not in charge of making decisions).
Incentives: First Things First
Why do people work? Why do they save, spend, or invest their money? And why do they participate in a DAO rather than just holding cryptocurrency?
The answer to all these questions is incentives. People are motivated by things that give them pleasure or help them avoid pain. Incentives can be material (like money or resources) or non-material (like fame or power).
In the case of a DAO, the incentive is typically a token. This could be a cryptocurrency, like ether, or a token specific to the DAO. Tokens give participants a way to share in the success of the DAO—if the DAO does well, the value of the tokens goes up, and participants can cash out.
Tokenomics is a portmanteau of "token" and "economics." It's the study of how tokens are used within an economy, and it's a crucial part of setting up a DAO.
There are a few main questions to answer when it comes to tokenomics:
- How are tokens distributed?
- How do participants use tokens?
- What is the relationship between the value of the tokens and the success of the DAO?
These questions are interrelated, and the answers will determine the incentives for participants. For example, if tokens are only given for committing beneficial actions to the DAO (like developing software or writing articles), then participants will have an incentive to do those things. On the other hand, if tokens can be bought and sold on a free market, then speculators will also be motivated to participate in the DAO.
A DAO is only as strong as its community. If no one participates, then the DAO will fail. That's why it's important to grow and nurture a community around your DAO.
There are a few ways to do this:
- Find existing communities that align with your DAO's goals, and reach out to them. For example, if you're setting up a DAO to support open-source software development, you can find existing communities of developers and offer them a way to participate in and profit from your DAO.
- Create content that engages potential participants. This could be blog posts, videos, or anything else that gets people interested in your DAO.
- Offer incentives for early adopters. This could be discounts on tokens, or preferential treatment in the decision-making process.
Finding the Right Channels
There are many channels for marketing a DAO, and the right ones will depend on your community. Some popular channels include:
- Social media: Twitter, Facebook, Reddit, 4chan, Quora
- Blogs: Medium, Hackernoon, Personal websites
- Forums: Bitcointalk, Ethereum subreddit
- Conventions and meetups: LinkedIn Events
- Advertising: Google AdWords, Facebook Ads, Twitter Ads
A DAO treasury is a fund of cryptocurrency or fiat that is used to support the operations of the DAO. The treasury is typically managed by a multisig wallet, which requires multiple signatures (usually 3-5) to make a transaction. This ensures that the fund can't be easily stolen or misused.
There are many options for multisig wallets, including Gnosis Safe, Multisis, Squds, Llama, and more. Each has its own advantages and disadvantages, so it's important to choose the one that's right for your DAO.
Funding the Treasury
The treasury needs to be funded in order to support the operations of the DAO. There are many ways to do this, including:
- Sponsorships: Find companies or individuals that are aligned with the goals of your DAO and ask them to donate funds.
- NFTs: Use non-fungible tokens (NFTs) to raise funds. This could be done by selling NFTs that represent ownership in the DAO, or by using NFTs as a way to reward participants.
- Tokens: Offer a percentage of the tokens for sale to fund the treasury. This is similar to an initial coin offering (ICO), but it's specific to the DAO.
- Other methods: There are many other ways to fund a DAO, including grants, loans, and crowdfunding.
A DAO needs to keep track of its finances in order to make sound decisions about where to allocate funds. This includes both income and expenses.
Traditional double-entry accounting, used by the likes of Xero and Quickbooks, falls short in a DAO context. That's because a DAO doesn't have a centralized bank account; instead, it has many wallets, each with its own balance.
A better solution is to use an accounting system that is tailored for DAOs. Bulla Network is one such system. It allows you to track your DAO's financials in real-time, and it integrates with popular wallets like MetaMask.
When setting up a DAO, it's important to choose the right framework. There are many different frameworks available, each with its own benefits and drawbacks. Some popular options include:
- Aragon: Aragon is a decentralized governance platform that enables organizations to run on the Ethereum blockchain. It's focused on giving power back to the community, and it offers a wide range of features to help DAOs run smoothly.
- Colony: Colony is a decentralized network of companies and freelancers that work together to get things done. It's focused on efficient collaboration, and it offers a suite of tools to help DAOs coordinate work and manage finances.
- dOrg: dOrg is a full-service blockchain agency that specializes in DAO development. It offers a wide range of services, from tokenomics to community management.
The Regulatory, Governance, and Tax Landscape
The regulatory, governance, and tax landscape for DAOs is still evolving. In the United States, the Securities and Exchange Commission (SEC) has yet to issue clear guidance on how DAOs should be regulated. This leaves many questions unanswered, such as:
- Are DAO tokens securities?
- How should DAOs be governed?
- What kind of taxes do DAOs need to pay?
While DAOs were once considered by many in the Web3 space to be pseudo-anarchistic and beyond the reach of traditional institutions, this is no longer the case. As DAOs become more popular and more money flows into them, it's inevitable that regulators will take notice.
The Technology Landscape
DAOs, in theory, operate on a blockchain, and blockchains are largely closed-loop systems. That is, they don't interact with the traditional financial system.
But in practice, many DAOs do need to interface with fiat currency (government-issued currency, like USD) and traditional financial institutions. For example, a DAO might need to pay its employees in fiat, or it might need to purchase goods and services from vendors that don't accept cryptocurrency.
Not only that, but everything from messaging to meetings is typically not done on a blockchain. That's why most DAOs use off-chain solutions for these activities. The balance between decentralization, convenience, and security is a delicate one, and it's something that DAO participants need to be aware of.
The Economic Landscape
DAOs are a new type of organization, and they're still grappling with how to create value. In traditional companies, shareholder equity typically comes from two sources: debt and equity. Debt is money that is borrowed and needs to be repaid, with interest. Equity is ownership in the company, and it can be sold for a profit.
In a DAO, there is typically no equity. Instead, value is created through the use of tokens.
DAOs are a new type of organization, and they offer a number of advantages over traditional companies. They're decentralized, autonomous, and they run on code rather than being centrally controlled. They also have the potential to create value in new ways, through the use of tokens.
However, setting up a DAO is not without its challenges. There are many moving parts, and it's important to get the incentives right. There's also the regulatory, governance, and tax landscape to consider. And finally, there's the technology landscape, which is constantly changing.
Despite these challenges, DAOs offer a lot of promise. They're a new way of organizing that could potentially upend the traditional corporate model. And as more and more money flows into them, they're only going to become more popular.